Oil prices: it’s not just Ukraine, nor “big bad oil companies”. Not is it even mere supply and demand. I’ve seen a lot of people on social media (including friends) fall for some fantastic fallacies and pop-appeal “malarkey” offered by politicians and celebrities, that are wildly ignorant of economic fundamentals as applied to the crude-oil markets.
First and foremost, oil is a predictive market — strongly futures-influenced. You can call it “speculative” if you want, but you’d be misrepresenting things; “speculation” implies guessing without basis, and therefore is as worthless a term as calling weather forecasts “speculation”. Both can be wrong, and often are to varying extents, but are still well-educated predictions by experts in their fields, and are near the mark more often than way off it. Unexpected spikes and falls happen due to unexpected and/or severe events, whether geopolitical (invasions, etc.), mechanical (major-refinery failure) or natural (tsunami, northern Gulf hurricane, protracted deep freeze or heat wave).
Because oil prices are rooted significantly in futures, current and recent Federal government policy (yes, that includes executive orders as well as things Congress threatens to do, much less actually passes) absolutely influences prices. Yes, canceling pipelines and imposing moratoria on new leases and drilling don’t change the current supply. Each does, however, threaten to curtail future supply. Again, prices are based on futures. Then when a major producer (USA) isn’t producing to its capacity, that dwindles current supply and prices, as well as raises futures. An obvious solution, purely economically, is: produce more!
Overlay these factors, along with other global supply threats like a war involving a huge and boycotted oil producer (Russia), and we get what we see. Throw in ambient price inflation due to unrestrained money printing (watch this this slightly over 1-hour lecture by Milton Friedman for a full explanation), and the resultant devaluing of the money relative to goods and services, and that adds to the problem. In turn, rising fuel costs add to inflation, and it becomes a sort of slow-motion death spiral. Hence, the Fed steps in and raises interest rates, which historically curtails inflation over the span of months to years, but harms the Federal budget through higher interest payments on our incomprehensibly enormous national debt.
Oil companies aren’t innocent here, but not for the reasons you may think. All companies have the right to make a profit; otherwise they go bankrupt and fail shareholders (including many Americans’ 401Ks and pension plans). Blaming profiteering or price gouging by oil companies is populist bullshit! Utter economic quackery, and most of the politicians who say this know it…they’re just pandering for votes from the mass ignoranti. Nothing more.
Oil companies can profit off low prices at high volume, just as off high prices at lower volume. Instead, where they went wrong was in their experts’ inability to foretell supply (and supply-chain) problems and adjust accordingly beforehand, including through greater refining and production capacity. Part of that is their fault through lack of foresight and poor planning. Penny-wise, pound-foolish! But a lot of it is not.
What is one reason refining and production are slow to move? Wait for it…governmental regulation (a.k.a. interference). Every unfunded governmental mandate adds to the cost of doing business, no matter your business. It just does. This is fact. You experience this when you spend lots of time (time is money!) doing your taxes, which is mandated, or buying software to help you. Business owners see this in many more ways.
Magnify that by hundreds of thousands of regulations — federal, state, and local — baked into the cost of extracting and producing petroleum-based products of all kinds, including gasoline. Compliance corporately is a huge drag on cost, additively. Indirect attacks, such as regulating banks that lend to the oil industry, further add cost. [Look up “Biden Administration Restricts Leasing for Overseas Fossil Fuel“, which of course the Sierra Club loves. I presume none of them ever have been poor and needed to drive a petroleum-powered vehicle to work.].
It’s fair to argue what regulations are needed and what aren’t, but the fact is, they *add cost* regardless. Take a look just at biofuel mandates, for example. Threats of still more regulation, prohibitions, and actual executive orders, drive up futures. Futures heavily move current prices. Therefore, the oft-seen mantra, “Presidents don’t influence prices” is garbage. They absolutely, positively do. While the Biden “I did that!” sticker you see on gas pumps isn’t completely true, it has some merit.
It’s irrational how people who support one party’s candidate or the other subscribe wholesale to whatever that candidate spouts off. Whither independent thinking? Those who claim Biden policies have nothing to do with inflation as a whole, or of fuel in particular, have turned off a key part of their brains. Same with those who ignored Trump’s straight-up factual lies on other topics. Yet these men were both pretty honest about what they were going to do, and they did it.
Biden fulfilled promises that have direct and short-fused influence on petroleum inflation. If you like that, it shows either your ignorance of basic ECON 101 concepts, or reveals a pampered, soft, privileged status of not being poor enough, and being hurt enough, by inflation to change your mind. I was in a poor household, in the ’70s to early ’80s oil crises, and can testify the effects are real even to renters, on prices of basic needed goods, electricity, and so forth, as well as rent itself.
Stop falling for and repeating political lies because you voted for the liar — of either party. It hurts your own credibility in argument. To wit, the current administration’s turn from “Putin’s fault” to “price-gouging oil companies”, for the very same event, has been remarkable. Both excuses are way, way overplayed, with only a partial, lower-order speck of truth in the case of Putin. It’s just a distraction and diversion to take your attention from the tangible effects on futures (thus on current prices) of this administration’s executive orders and this Congress’ statements and bills directed at future availability.
Finally you can say we should get off oil. Fine. Over decades, I agree. I think we should too, and in America, go all in on lowest-carbon, highest-efficiency, smallest-imprint, least-waste-volume nuclear energy long term. Others claim renewables someday, somehow, will be a steady and dependable source. Whatever. That’s then. This is now. Until we can, and do, we are dependent on fossil fuels, especially for transportation and lubricants — like it or not. High prices in all those drive up costs for all goods and services, and hurts the poor the most.
Perhaps, just perhaps, that’s by design. After all, even if not deliberate, the more people in poverty, the more dependent they are on central governmental authority. And by extension, the easier they are to control. We are clearly headed for a digital (therefore trackable by centrally controlled AI) currency. Do some critical thinking about that as well. When you do, current events make more sense, including what China is doing with their mass tracking and “social credit” tyranny. I’ll leave the specifics of that exercise to you, to the extent it can be applied here.
Finally I’ll finish with a quote from a recent President’s State of the Union address. How I wish the same claim honestly could be made today.
“Nowhere is the promise of innovation greater than in American-made energy. Over the last three years, we’ve opened millions of new acres for oil and gas exploration, and tonight, I’m directing my Administration to open more than 75 percent of our potential offshore oil and gas resources. Right now, right now American oil production is the highest that it’s been in eight years. That’s right – eight years. Not only that – last year, we relied less on foreign oil than in any of the past sixteen years.” — Barack H. Obama